Have you decided to return to school? Investing in yourself is money well-spent, as it can lead to personal growth and the potential to increase your income with honed skills and new degrees. But how do you plan to finance it?
The way you choose to fund your education can either help you toward your goal or hamper it. Here’s how to choose between federal student loans and private student loans by asking yourself some simple questions.
What are federal vs. private student loans?
When it comes to financing your education, you’ve got two options for borrowing, broadly speaking: federal student loans and private student loans. Let’s quickly define each.
Federal student loans
Federal student loans are government-funded loans issued by the U.S. Department of Education. They’re standardized in terms of borrowing amount, interest rates, and protections (we’ll cover those in a minute).
In lieu of a credit check as required for most loans, you’ll open a federal student loan by filling out a Free Application for Federal Student Aid (FAFSA). This makes federal student loans very accessible, as even those with bad or thin credit can be approved. The one exception is PLUS loans, which are for parents and graduate/professional students and which do require a credit check.
Only Title IV-eligible institutions qualify for federal student aid. That is, your school must be both accredited and approved to accept federal aid. Most universities and colleges are, but you’ll find that overseas schools, bootcamps, or nonaccredited certificate programs won’t qualify.
Private student loans
Private student loans are not issued by the U.S. Department of Education. Instead, they’re offered by institutions that require a credit score from applicants for approval—such as a bank or online lender. They’re helpful for those who either need more money than they can get from a federal student loan or are pursuing an education at an institution that doesn’t qualify for federal aid (such as an unaccredited college).
Private student loans don’t come with the same standardized terms as a federal student loan; their interest rates vary, as do their hardship programs.
Pros and cons of federal student loans
Pros
- Low fixed interest rates
- No credit check required for most loans
- Typically more robust hardship plans than private student loans
Cons
- Borrowing caps may be insufficient for your needs
- Origination fees
- Covers fewer school types than private student loans
Pros and cons of private student loans
Pros
- Fund the aspects of your schooling that scholarships and grants don’t cover
- More flexible repayment structure (term length, fixed vs variable APR)
- Potentially larger borrowing amount than what a federal student loan offers
Cons
- Fewer safety nets than a federal student loan
- Typically requires good credit (or a cosigner)
- Generally higher interest rates than federal student loans
How to decide between federal and private student loans
If you’re unsure which type of student loan will best suit your education goals, ask yourself the following questions.
Have you already opened a federal loan?
Generally speaking, a federal loan should be your first choice when looking to finance your higher education. Again, there’s a lot to like—from lower maximum interest rates than (most) private student loans to guaranteed income-driven repayment options.
If you haven’t tapped your federal student loan options, or if you qualify for more federal funding, it’s typically best to go that route. If you’ve already maxed out your available federal student loans and you need more funding to cover all your expenses, a private student loan could be the perfect way to supplement.
What’s your credit score?
Private student loans require a credit check. Federal student loans do not. There are pros and cons to each.
If your credit score lives in the basement—or if you’ve got limited credit history—you may not qualify for a private student loan unless you’ve got a cosigner with a more impressive credit profile. And the best rates are reserved for those deemed most creditworthy.
If neither you nor your cosigner have excellent credit scores, or if other common factors leave a lot to be desired (think high debt-to-income ratio, insufficient income, or a record of unsteady employment), you may find yourself paying interest far above what you could get with a federal student loan. If, however, you are able to qualify for the best rates, you might potentially pay less than if you had opened a federal student loan.
How important are hardship programs to you?
Because federal student loans are required to come with certain safety nets in the event of hardship, they can be a less risky proposition than private student loans. You’ll get options like:
- Forbearance: Temporarily pause or reduce monthly payments
- Deferment: Postpone your payments (for subsidized loans) without accruing extra interest in eligible circumstances—such as returning to school, economic hardship, unemployment, etc.
- Income-driven repayment: Monthly payment is directly proportional to your discretionary income
While federal student loans are the only type of student loans that standardize these programs, you may also find private student loans that offer them. Just note that they’re not guaranteed.
Does your school accept federal financial aid?
You can’t pay for just any school with federal financial aid. Federal student loans can only be used at Title IV-eligible institutions, meaning accredited schools that have been approved by the Department of Education to qualify for federal aid. If you plan to pay for a coding bootcamp or an unaccredited vocational school, for example, federal aid won’t help you.
Private student loans tend to be more lenient when it comes to where you go to school. Each lender has its own rules, but it’s possible to find a private student loan that covers much more than just Title IV-eligible schools.
The takeaway
Your best course of action is to enroll in federal student loans first and save private student loans as a supplement if your education exceeds your federal maximum borrowing limit. The exception is if you’re pursuing a degree at an unaccredited institution that doesn’t qualify for federal aid.
Frequently asked questions
Can you convert private student loans to federal loans?
You cannot convert private student loans into federal student loans. However, you can convert federal student loans into private student loans by refinancing.
What credit score do you need for a private student loan?
You won’t find a hard credit score requirement across all lenders. However, you’ll often need at least a “good” credit score to qualify (670 or above, per FICO).
Do federal student loans require a credit check?
Most federal student loans do not require a credit check. They instead require that you fill out a FAFSA form detailing your financial information. This helps the government to decide how much aid you qualify for.
Can you have both federal and private student loans at the same time?
Yes, you can have both federal and private student loans at the same time. This is common, as private student loans are often used to supplement federal student loans when more funding is required.
Can private student loans be forgiven?
Private student loans don’t come with the same protections such as forgiveness and income-driven repayment that you can find with federal student loans. You’d typically have to file for bankruptcy to have your private student loans wiped away.
